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Thursday, August 5, 2010

The Stupidest Advice I've Ever Heard

¹²The Stupidest Advice I've Ever Heard

By Jeff Clark | 5 August 2010

"You have to own stocks here," says one CNBC talking head after another."There's too much money on the sidelines, and as stocks keep going up, investors will feel the pressure to put that money into the market. That will push stock prices even higher."

Give me a break.

Is that the best reason they can come up with for buying stocks? It's not because stocks are cheap (they're not), or that growth rates are high (they're not), or because the business climate is bustling (it isn't). No, they're telling you to buy stocks now based on the "greater fool" theory— the hope that a greater fool will come along and buy the shares from you at a higher price later.

It's the stupidest advice I've ever heard.

First off, we've been listening to that sort of talk for most of the past year and stocks are roughly at the same level as they were last summer. Oh sure, the S&P 500 did manage to pierce 1,200 in April. That was the month mutual funds experienced their largest cash inflows of the year. It was also the month that preceded the 1,000-point 'flash crash'.

So much for the strength of the greater fool theory.

The talking heads also argue that there isn't anything else for investors to do with their money. They'll just have to buy stocks. After all, who's going to sit in 0% money market funds, or buy 10-year U.S. Treasuries at 3%, or buy long-term corporate debt for 4.5%?

Wait a minute. Investors have been sitting in 0% money market funds for two years. They have been gobbling up 10-year Treasuries at 3% yields. And corporate America had no problem issuing billions of dollars in debt last month at the lowest interest rates in two decades. It seems to me, if the money hasn't come in from off of the sidelines by now, it probably isn't going to.

The problem is the average investor no longer trusts Wall Street. They know it's a rigged game and most folks don't want to play it anymore. Who wants to go up against high-frequency trading programs and the Goldman Sachs trading desk, which hasn't had a losing day since the Romans conquered Greece? Investors have been settling for measly returns in exchange for not getting scammed. That's probably not going to change anytime soon.

In order to coax the average investor back in from off of the sidelines one thing has to happen: Stocks need to get cheap enough to where the value and the potential for future profits— even with the threat of increased taxation on those gains— far outweighs the risk of loss in a rigged system. We're still pretty far away from that right now.

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